Financial Guidance to Help Your Business Succeed

Right now the maximum federal tax rate on LT Capital gains is 15%. Absent Congressional action, starting next year, the maximum rate on LT capital gains will increase to 20%. Also starting next year, there will be a new 3.8% Medicare contribution tax that will apply to the lesser of:

Net investment income (including capital gains)

Modified Adjusted Gross Income (AGI) in excess of $200,000 ($250,000 for MFJ and $125,000 for MFS)

This means that wealthy taxpayers may end up paying 23.8% tax on their garden-variety LT capital gains starting in 2013.

Investment moves should not be made solely to capitalize on the current low capital gains rates. However, if you think that the LT capital gains rates will increase next year and you are planning to sell sometime in the near future anyway, here are some tax planning strategies to consider:

If you own appreciated LT capital gains securities (that you have held for more than a year) that you intend to sell within the next few years, you might consider selling them during the remaining months of 2012 to recognize those gains at a 15% tax rate. If you think a security will continue to appreciate, you can immediately buy it back. This will step up your tax basis to the current value at a low 15% tax rate. Only gains beyond this value will be taxed at the anticipated higher rate.

If the rate increases as scheduled next year, installment sales of certain LT capital gain property (such as a piece of raw land you have held for over a year) provide a number of opportunities to capitalize on the 15% LT capital gain rate for 2012. In fact, installment sales that originate in 2012 offer a rare chance to use 20/20 hindsight in that you have until the extended due date of the 2012 Form 1040 to decide if you want to report the full gain in 2012 and pay taxes at the current 15% rate or instead report the gain when you receive payments on the installment note and pay taxes at whatever rate applies during that year.

The current low tax rates combined with the current low applicable federal interest rates makes 2012 an especially good year to consider making installment sales of capital assets to family members.

In the case of a pre-2012 installment sale (for which it is too late to elect out of installment treatment) it is still possible to accelerate the remaining gain into 2012 if you take certain actions before the end of the year.

With careful planning, we can help you determine whether you would benefit from putting LT capital gain planning strategies in play this year. Please give us a call if you have questions or want more information.